The Next Economy: Cover Story

A Dream Endangered. (Yeah, So?)

Has homeownership been oversold as an essential part of the American Dream? As an investment or a social good, it probably has. But it’s no less alluring.

By Paul Starobin

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Their castle: Dave Carlson and Brigid McKenna skipped a starter home and saved up for the house of their dreams in Shrewsbury, Mass.(Jason Grow)

WORCESTER, Mass.—Emily Perlow is a 30-year-old single woman who radiates confidence when talking about her job as director of student activities at a local university. But when talking about the subject that occupies her mind these days, the prospect of becoming a home­owner, she is admittedly terrified. Her fears run the gamut, from the risks of assuming a substantial mortgage—“It is certainly cheaper for me to rent,” she acknowledged in a recent chat over coffee—to uncertainty about whether she’d ever be able to sell her property for a profit.

And yet, she’s on a relentless quest to escape her rented apartment by purchasing a detached, single-family home with more living space than she actually needs. “Honestly, I think it is a status mark,” Perlow said. “If you meet someone who is a homeowner, you think, ‘They’re stable, they have a good job, and they’re responsible.’ As a single woman, when I meet a man, and he owns his own home, I view that as an attractive quality. I’m 30. It’s about time to start my life.” And with that pert thought, she turned wistful. “I just want it to be mine,” she said of the home that she is scared—but not too scared—to buy.

For many if not most Americans, the dream of homeowner­ship abides. The meltdown of the nation’s housing markets dating to 2007 touched off the nation’s worst economic downturn since the Great Depression. Still, a survey last year by government housing-finance giant Fannie Mae found that 80 percent of Americans—including 77 percent of renters—believe that a high rate of homeownership is important to the economy.

The ripe question, though, is whether homeownership should be viewed as a holy grail. Not only the citizenry but Washington has treated homeownership as a universal ideal. Any mortgage that Perlow would obtain is apt to be backed by the federal government, which currently supports 92 percent of all newly issued home loans. The government has long used its vast powers to promote an ever-rising rate of homeownership: “The higher, the better” was the credo of Democrats and Republicans alike, aiming to give people a tangible stake in their communities. The modern apostle of homeownership’s blessings was a Republican, Herbert Hoover, who adopted the cause as Warren Harding’s Commerce secretary in 1921-23. “For it is mainly through the hope of enjoying the ownership of a home that the latent energy of any citizenry is called forth,” Hoover proclaimed.

As the Great Depression receded, the homeownership rate did increase, from 44 percent in 1940 to a peak of 69.2 percent in mid-2004. The recent housing crash and the wave of foreclosures that followed lowered the rate to 66.5 percent in the fourth quarter of 2010, according to Census Bureau figures, and market forces may yet shrink it further. Is that OK, perhaps even healthy? Is it high time for the nation to jettison the goal of homeownership for all American households that President Clinton embraced in the 1990s? If so, should renters receive more assistance?

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As the Obama administration and Congress try to map a post-bubble future for housing policy, a lot rides on the answers to these questions. In a nation of 112 million households, now split between 75 million homeowners and 37 million renters, adding 1 percentage point to the ownership rate translates to another 1.12 million dwellings. Homeownership supports a vast economic sector that includes real-estate agents, mortgage bankers, construction firms, and remodelers. Yet, the government’s efforts to promote homeownership cost the U.S. Treasury billions of dollars and leave taxpayers on the hook for many billions more.

In cultural terms, a shift away from homeownership as a civic ideal would be viewed in some quarters as positively un-American. Owning a plot of one’s own has defined this nation since Thomas Jefferson’s beloved yeomanry and the gifts of 40 acres and a mule to freed slaves after the Civil War. This departure would mark, at the very least, a transformation in the meaning of the American Dream.

A SO-SO INVESTMENT

In recent decades, this storied dream has increasingly become a financial one. Buying a home is the biggest investment that most Americans will ever make. And until recently, it was a seemingly sound one: From 1997 to 2006, inflation-adjusted housing prices rose by a remarkable 85 percent. Why would anyone choose to rent if he or she could afford to own?

It was this logic that led so many renters—with the support of the government and the purveyors of subprime mortgages—to “buy” homes with little or no money down over the past decade. (The bank, of course, is the real owner when the buyer has no equity.) The renter was tossing money away, it was said, while the homeowner was gaining equity and accruing wealth.

But let’s sift through some of the oft-touted benefits of homeownership over renting. In truth, the advantages are less extensive than advertised. Owning a home entails significant costs: The average homeowner spends 2.5 to 3 percent of its value each year on maintenance and repairs, in addition to shouldering closing costs, mortgage payments, insurance, property taxes, and utility bills. Just as with renters, whose monthly payments might cover some of those costs, these are expenditures that bring no financial return.